What is a pension?
A pension is a tax-free wrapper for savings in which you can accrue money up until your retirement where it can be drawn down. This means that you can add up to a certain amount per year into your pension and earn interest tax-free up to the maximum lifetime allowance.
You are taxed when you draw down your pension in retirement, but the significant reason for using a pension is to ensure you receive the maximum return on any investment interest you earn whilst your money is being stored, which allows your money to compound at a faster rate.
How does money go into my pension?
Most employees will automatically have pension contributions deducted from their wages after national insurance deductions, with many also receiving a contribution from their employers. When coupled with the state pension, accrued from national insurance contributions, many retirees have sufficient money to draw down at retirement for their living expenses. The personal contribution can be altered depending on the employee’s preferences.
Now, for sole traders, the situation is different, as you would need to set up and invest in a pension yourself or with the help of a professional advisor. One of the additional benefits of holding a pension occurs for individuals who are working through a limited company.
Limited Company Pensions
There are a number of different tax liabilities when you run your own business such as the need to pay corporation tax – and you may need to charge VAT depending on your clients and the nature of your work. However, you can claim some of these costs back, creating some tax savings. Additionally, depending on how you draw your income, you may have lower national insurance contributions.
Further to any potential tax efficiency benefits, owning your own business means you can decide how to use your income in a more flexible manner. This can include ensuring your pension pot is sufficiently full before retirement, allowing you to more accurately determine how much you can sustaidrawdownw down in later life.
How to add to my pension using a limited company
With owning your own business, you can decide to sacrifice some of the money you would otherwise have taken out of the company and use it to go into your pension pot before paying any taxes on it, over and above any personal contributions, which would still be exempt from income tax.
This means you could also deduct pension contributions from your overall profit. This means you could effectively utilise more of your earnings before tax, to build up your pension pot relatively quickly. You may have spotted that employees would also have the choice to increase their pension contributions, but they would still need to pay their national insurance contributions from any invested money, whereas contributing through your limited company would not incur this additional tax.
Your ability to add further contributions from the business income to top up your personal pension means that you can usually invest a significant amount more into your pension than would otherwise have been possible as an employee.
I am a locum doctor, should I set up a limited company?
This is very dependent on your individual circumstances, so it is best to receive professional advice, which we offer with our accountancy services. We can advise on whether a limited company could help you with not just your pension contributions, but also your tax planning. We can help you with setting up a limited company in a tax efficient way that may improve your take-home pay, and we can help you take the hassle out of submitting your tax returns.
Get in touch with Gorilla Accounting to find out more by calling 0330 024 0406 or email info@gorillaaccounting.com.
